The ECB and the Tech Sector Juice the Stock Market

The ECB and the Tech Sector Juice the Stock Market

The two events, which last weekend we opined would put pressure on the stock market, came to pass; the 19th Chinese Communist Party Congress ended this week, and the Donald spoke indecipherable about appointing the next Fed Chairman.

The former, concluded with the insertion into the party’s constitution of a new guiding ideology, labelled Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. This is the first time since Mao Zedong Thought that a living party leader enshrined into the party constitution an ideology named after himself. That is quite the party trick, and one that demonstrates an impressive amount of political control. Now that he is firmly in charge, it remains to be seen what he does with this control, and how it affects China’s and, therefore, the world’s economy.

The Donald’s handling of the Fed’s Chairman appointment continues to be a parody of some kind of reality tv show; he actually asked the interviewer, Lou Dobbs, who he thought should be appointed. It is the first time a sitting president has turned an interviewing journalist into an ad hoc presidential advisor. As usual, Trump does not know what he is going to say until the noise comes out of his mouth.

The market reacted as expected, pulling back through mid-week, but rallying at the end of the week on good earnings from the technology sector, and the promise of “dovish taper” from the European Central Bank.

We started layering into SPXS in small amounts earlier in the week in anticipation of the expected correction. Friday caused the market to move against this position, so we will monitor the situation going into next week. The probability of a correction is still high, despite the one-day rally.

Despite the euphoric reaction in the stock market to dovish taper, the CME FedWatch tool increased the probability of a quarter point rate-hike in December to 97.8% and the chance of staying put at 0%.

The bias for rates is up, no doubt about it. The stock market is not reflecting this reality…yet.



Equities

Sentiment
The AAII investor sentiment survey shifted 5.1% from neutral to bearish, and 1.7 % from neutral to bullish. That, of course was as of mid-week, before Friday’s rally. At this point, it is likely that bullishness — which is required for a serious correction to take place — will increase in response to Friday’s euphoria (chart below).

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The NAAIM index increased slightly during the week, but not enough to affect the correlation. For the correlation to revert to the mean, the NAAIM and the SPX must either increase together, or decrease together. This sentiment indicator remains at neutral (chart below).

The put-to-call ratio 8-week moving average (8MA), has been dropping back down from a bullish spike, but has started an upward turn (potential bearish spike). If it continues to rise, then there is an 80% chance of a correction. Here again, this indicator is neutral (chart below).

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Technical

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The long-term moving averages continue to paint a strong bullish picture (chart below).

Fundamental

GAAP earnings continue strong and are supportive of the continuing bull market (chart below).

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Gold

During the week, gold dropped down to meet the 38% Fibonacci retrace line of the 2017 rally at $1270. The dollar has strengthened its bullish reverse head-and-shoulders pattern, and rates have pulled back slightly after rising strongly within the trend channel (chart below). A short-term bounce in gold at this point would not be surprising, however, the upside to gold remains limited by the clear upside bias to rates and the dollar.

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Inflation expectations, as measured by TIP, dropped earlier in the week, but recovered on Friday to finish up fractionally for the week. A further rise up to the 50% Fibonacci retrace of the July to September rally would not change the downward bias of TIP (chart below).

The commitments of traders net positions (up to last Tuesday) changed hardly at all. The producers increased their net short position slightly to 182K; the swap dealers reduced their net short position by 10% to 28K which puts it at a neutral level; the managed money remained unchanged at net long 168K. There is some uncertainty among the futures traders as to what gold is going to do next, but the positions levels correspond more with a bearish bias than a bullish one (chart below).

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Source: Nicholas Gomez